How A Bridge Loan Works

A buyer may not have to go through with purchasing a home until their old home sells

You've probably heard the term bridge loan before. Perhaps the phrase swing loan, interim loan or gap financing is more familiar. Whether it was on a television show, in a movie, or talking to a neighbor, the term is one that gets thrown around regularly. Not many people really understand the concept though.

If you're selling your home and looking to buy another one, bridge loans can be a very helpful concept to understand. For many people, this type of loan is the easiest and most efficient way to move from one home to another without occupying rental property or living out of a hotel in the meantime.

Why Get a Bridge Loan?

The reason most people turn to the bank for bridge loans is a simple one - they're looking to buy a new property before they sell their existing one. In some cases, people seek bridge loans almost immediately after deciding to sell their home so they have time to find the right property.

This type of loan can be very helpful for people who are in a competitive housing market where they know their house will sell, and that finding a new home could be somewhat difficult. With cash for a bridge loan available, a potential buyer won't miss out on a property that was well-price or simply the right home for the buyer.

How Long Are Bridge Loans?

Bridge loans vary depending on the lender and the terms negotiated, but for the most part, they are issued for six months or twelve months and the full amount is due in that period of time. However, it is possible to carry a bridge loan for up to three years in some cases.

Individuals interested in talking about bridge loans may need to speak with their lender about special loan options if a typical six month or twelve month loan term is not ideal.

Are There Risks?

The biggest risk when it comes to bridge loans is not selling your current home before the repayment deadline. If that happens, you'll face fairly high interest rates on average just to keep the loan current.

With the added cost of a new property, having a bridge loan and a mortgage to pay is nearly impossible for some homeowners.

What About Benefits?

Aside from the fact that you could find and buy the home you want before closing the sale of your current property, bridge loans do provide some benefits for borrowers, at least in some cases. These benefits generally come in the form of home buying contingencies.

For example, per some purchase contracts, a buyer may not have to go through with purchasing a home until their old home sells. A bridge loan can help in situations where a seller won't agree to certain purchase contract terms.

In many areas where homes are in high demand and the market is up, bridge loans are the only option for people who have found the home they want before the sale of their current property has closed.

What to Look For

If you do decide that using a bridge loan could be right for you, there are a few things that can make the process easier and less of a risk for you. After all, not all bridge loans are created equal.

One of the most important things to keep in mind is that seeking a bridge loan and a long-term loan for your new property from one lender will often result in lower interest rates on the bridge loan. If they know they'll be earning on your long-term home purchase, they will be more likely to give you good terms to help you get into that house.

Another thing to consider is that not all banks and lenders offer the same rates on bridge loans. If you feel like obtaining one is wise for you, take the time to check rates, repayment terms and how long you can hang onto the loan before paying interest.

Securing a bridge loan can help you buy new property before your current home sells, but it isn't right for every buyer. If you're unsure of if and when your own property will sell, you could face interest and penalties that put a big dent in your buying plans in the future.

Do your research and make sure a bridge loan truly is the best option.